cost volume profitability analysis of shinepukur ceramics

Cost Volume Profit Analysis:“A Study Based on the Shinepukur Ceramics Limited”

Submitted By:Samia Ibrahim

Nasrin Sultana

Salva Wahida

Hamida Begum

Bijoya Bhowmik

Submitted to:Professor Dr. Ayub Islam

Course Title: Management Accounting

Date of Submission: 24th July, 2015

Table of Contents1.0 Introduction:......................................................................................................................................3

1.1 Purpose of study:...............................................................................................................................4

In this paper we have tried to outline some objectives which mainly focus on the profitability of

Shinepukur Ceramics limited..................................................................................................................4

2.0 Research Methodology..........................................................................................................................4

2.1 Research Design:...............................................................................................................................4

2.2 Data Sources:.....................................................................................................................................4

3.0 Findings and Analysis.............................................................................................................................4

3.1 Fixed Costs & Variable Costs:.............................................................................................................4

3.2 Major Fixed Costs:.............................................................................................................................6

3.3 Total Fixed Cost:................................................................................................................................7

3.4 Major Variable Costs:........................................................................................................................9

3.5 Total Variable Cost:..........................................................................................................................11

3.6 Contribution Margin:.......................................................................................................................12

3.7 Contribution Margin Ratio:..............................................................................................................12

3.8 Break Even Point in Taka:................................................................................................................14

3.9 Margin of Safety in Taka:.................................................................................................................15

3.10 Net Income:...................................................................................................................................16

3.11 Break-Even Chart Analysis:............................................................................................................17

4.00 Conclusion:....................................................................................................................................19

References:................................................................................................................................................20

1.0 Introduction:

Cost Volume Profit Analysis (CVP Analysis) is the study of the relationship between revenues,

costs and profits of a business. The analysis is used to examine the relationship among the total

volume of an independent variable, total costs, total revenues and profits for a time period. Cost-

volume-profit analysis is useful in the early stages of planning because it provides an easily

understandable framework for discussing planning issues and organizing relevant data.

Cost Volume Profit analysis (CVP) is one of the most hallowed, and yet one of the simplest,

analytical tools in management accounting. In a general sense, it provides a sweeping financial

overview of the planning process. That overview allows managers to examine the possible

impacts of a wide range of strategic decisions. Those decisions can include such crucial areas as

pricing policies, product mixes, market expansions or contractions, outsourcing contracts, idle

plant usage, discretionary expense planning, and a variety of other important considerations in

the planning process. Given the broad range of contexts in which CVP can be used, the basic

simplicity of CVP is quite remarkable. Armed with just three inputs of data – sales price,

variable cost per unit, and fixed costs – a managerial analyst can evaluate the effects of decisions

that potentially alter the basic nature of a firm.

There are three main tools offered by CVP analysis:

Contribution margin analysis, which compares the profitability of different products,

lines or services you offer

Breakeven analysis, which tells you the sales volume you need to break even under

different price or cost scenarios

Operating leverage, which examines the degree to which your business uses fixed costs,

which magnifies your profits as sales increase, but also magnifies your losses as sales

drop.

In this paper using CVP Analysis we have analyzed the product of Shinepukur Ceramics Limited

to know whether the company is profitable or not by examining the interrelationships between its

costs, revenues, production volume and profits. Also we determined the breakeven point or level

of operating activity at which revenues covered the company’s all fixed and variable costs,

resulting in zero profit. Knowing about this point is very crucial for the business, because it is the

point a company wants to reach as quickly as possible in order to cover all the costs and start

making real profits.

1.1 Purpose of study:

In this paper we have tried to outline some objectives which mainly focus on the profitability of

Shinepukur Ceramics limited

The objectives of the study are:

a. To identify and calculate the fixed and variable costs.

b. To calculate contribution margin ratio, breakeven point in taka and margin of safety in

taka.

c. To prepare break even chart of Shinepukur Ceramics Limited.

2.0 Research Methodology

2.1 Research Design:

The data used in this study are compiled from Shinepukur Ceramics Limited’s website. The data

have been extracted, systemized, investigated and interpreted in this paper with proper reasoning,

clarification and explanation.

2.2 Data Sources:

All the relevant data regarding the study were collected from the annual reports of Shunepukur

Ceramics Limited.

3.0 Findings and Analysis

3.1 Fixed Costs & Variable Costs:

Expenses that must be paid no matter how many goods or services are offered for sale are called

fixed costs. There are other types of costs that change with the number of products offered for

sale. These are called variable costs.

In order to conduct the cost volume profit analysis it is very important to understand the

difference between fixed and variable costs. We identified Shinepukur Cermics Ltd’s fixed and

variable costs to have a better understanding about the company. The fixed and variable costs

are listed below:

SL Fixed Costs Variable CostA Direct Material:1 Raw MaterialB Manufacturing Overhead: 2 Gratuity Depreciation3 Office expenses Salaries, wages etc.4 Insurance expenses Power and fuel5 Occupancy expenses Packing materials6 Lease rental Transport expenses7 Welfare expenses8 Communication expenses9 Travelling & conveyance

10 Handling & carrying expenses11 Repairs & maintenances12 General expensesC Administrative Overhead:

13 Depreciation Transport expenses14 Salaries and allowances Communication expenses15 Gratuity Travelling & conveyance expenses16 Welfare expenses Utilities expenses17 Office expenses Repairs & maintenances18 Legal fees, prof. and other fees General expenses19 AGM expenses Handling & carrying expenses

20 Occupancy expenses21 Audit fee D Selling & Distribution Expenses:22 Promotional expenses Transport expenses23 Salaries and allowances Travelling & conveyance expenses24 Gratuity Communication expenses25 Advertising Utilities expenses26 Occupancy expenses Handling & carrying expenses27 Office expenses Repairs & maintenances28 Welfare expenses General Expenses29 Show room expenses

30 Legal and professional fees31 Product research 32 Lease rental

Table 1: List of Fixed & Variable Costs

3.2 Major Fixed Costs:

At any and all levels of output, the fixed costs of Shinepukur Ceramics’ Ltd. will always remain

same. The following table shows the percentage of total fixed cost used to cover the individual

fixed cost components for the year 2014.

SL Fixed Costs PercentageA Manufacturing Overhead:

1 Gratuity 10.17

2 Office expenses 4.01

3 Insurance expenses 2.12

4 Occupancy expenses 0.03

5 Lease rental 0.76

B Administrative Overhead:

6 Depreciation 5.68

7 Salaries and allowances 13.84

8 Gratuity 1.13

9 Welfare expenses 5.36


11 Legal fees, prof. and other fees 0.19

12 AGM expenses 0.69


14 Audit fee 0.40

C Selling & Distribution Expenses:

15 Promotional expenses 27.45

16 Salaries and allowances 11.85

17 Gratuity 0.92

18 Advertising 0.36




22 Show room expenses 0.37

23 Legal and professional fees 0.05

24 Product research 0.10

25 Lease rental 0.38

Total 100.00

Table 2: Major Fixed Costs

The percentage of major fixed costs out of the total fixed expenditure of the year 2014 is shown below:

27.45

25.69

12.92

11.3

6.88

5.68

2.12 7.96 Promotional expenses

Salaries and allowances

Office expenses

Gratuity

Welfare expenses

Depreciation

Insurance expenses

Others

Figure 1: Major fixed costs

The figure above shows that, Out of the total fixed cost it spends the largest portion to cover the

expenses of promotion and salaries. Other than these two the company’s some other major fixed

costs are office expenses, gratuity, welfare expenses, and depreciation and insurance expenses.

3.3 Total Fixed Cost:

Fixed costs are the Costs of production that do not change with changes in the quantity of output

produced by a firm in the short run. They remain constant even when your revenues rise or fall.

Total fixed cost is one part of total cost. Fixed costs are permanent and have to be incurred

independent of the quality of goods and services produced.

The total fixed cost of Shinepukur limited since 2010 to 2014 are shown below:

Years Total Fixed Cost

2010 89079122

2011 96401390

2012 102214877

2013 102313047

2014 174578342

Table 3: Total Fixed Cost

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

0

20000000

40000000

60000000

80000000

100000000

120000000

140000000

160000000

180000000

200000000

Fixed cost

20142013201220112010Co

st

Figure 2: Total fixed cost

The total fixed cost curve graphically represents the relation between total fixed cost incurred by

Shinepukur Ceramics in the short-run production of their product and the percentage of sales

revenue. Because total fixed cost is fixed, the total fixed cost curve is a horizontal line. The costs

increased steadily since 2010 to 2013. But after 2013 the fixed cost increased in a significant

manner. This happened because during 2014 the company had to incur two new fixed costs:

gratuity and lease rental.

3.4 Major Variable Costs:

As Shinepukur Ceramics is a manufacturing company, Out of the total variable cost it spends

most of the money to cover those variable costs which falls under direct material and

manufacturing overhead. The following table shows the percentage of total variable cost used to

cover the individual variable components of the year 2014.

SL Variable Costs Percentage

A Direct Material:

1 Raw Material 45.86

B Manufacturing Overhead:

2 Depreciation 21.72

3 Salaries, wages etc. 8.61

4 Power and fuel 9.66

5 Packing materials 7.47

6 Transport expenses 2.56


8 Communication expenses 0.067

9 Travelling & conveyance 0.12

10 Handling & carrying expenses 0.0088

11 Repairs & maintenances 0.78

12 General expenses 0.0015

C Administrative Overhead:



15 Travelling & conveyance expenses 0.47

16 Utilities expenses 0.045


18 General expenses 0.0072


D Selling & Distribution Expenses:


21 Travelling & conveyance expenses 0.18


23 Utilities expenses 0.044



Total 100.00

Table 4: Major Variable Costs

The percentage of major variable costs out of the total variable expenditure of the year 2014 is

shown below:

45.86

21.72

9.66

8.61

7.472.561.482.64

Raw MaterialDepreciationPower and fuelSalaries, wages etc.Packing materialsTransport expensesWelfare expensesOthers

Figure 3: Major Variable Costs of 2014

The figure above reveals that, Out of the total variable cost it spends a huge portion which is to

cover the costs of raw material and depreciation. Other than these two the other major variable

expenses of Shinepukur Ceramic’s are the costs power and fuel, wages, packing materials,

transport and welfare.

3.5 Total Variable Cost:

A variable cost is dependent on the production output level of goods and services. Unlike a fixed

cost, a variable cost is always fluctuating. This cost rises as the production output level rises and

decreases as the production output level decreases.

The total fixed costs of Shinepukur limited since 2010 to 2014 are shown below:

Years Total Variable Cost

2010 1197175437

2011 1236060207

2012 1219078593

2013 1028435016

2014 1202656347

Table No 5: Total Variable Cost

2010 2011 2012 2013 20140

200000000

400000000

600000000

800000000

1000000000

1200000000

1400000000

Total Variable Cost

Figure No 4: Total Variable Cost

Figure no. shows that during the recent years the total variable costs of Shinepukur Ceramics

Limited haven’t experienced much fluctuation except the year 2013. The variable cost of 2011

was slightly higher because the costs of wages, depreciation, power and packing materials

increased a bit compared to the other years. But in 2013 there was a huge downfall in total

variable cost because the sales of the company decreased in a significant manner.

3.6 Contribution Margin:

Contribution is the difference between sales and variable costs (expenses). Contribution

represents the portion of sales revenue that is not consumed by variable costs and so contributes

to the coverage of fixed costs. It represents the amount of income or profit the company made

before deducting its fixed costs.

Years Contribution

2010 729570282

2011 665384355

2012 723272159

2013 676132218

2014 475001327

Table 6: Contribution Margin of Shinepukur Ceramics Ltd.

2010 2011 2012 2013 20140

100000000200000000300000000400000000500000000600000000700000000800000000

Contribution Margin

Contribution Margin

Figure 5: Contribution Margin of Shinepukur Ceramics Ltd.

The figure shows that there was not much difference between the contribution margins of 2010

to 2013. But In 2014 an increase in variable costs caused the contribution margin to shrink.

3.7 Contribution Margin Ratio:

Contribution ratio is the contribution margin divided by the sales amount. It is the percent of

sales amount available to cover fixed costs. Once fixed costs are covered, the next amount of

sales results in a company's profits.

Years Contribution Ratio (%)

2010 37.87

2011 34.99

2012 37.24

2013 39.67

2014 28.31

Table 7: Contribution Margin Ratio of Shinepukur Ceramics Ltd.

Table no. shows the contribution margin ratio, which is the percentage of each sales taka that is

available to cover fixed costs and provide income.

2010 2011 2012 2013 20140.00%5.00%

10.00%15.00%20.00%25.00%30.00%35.00%40.00%45.00%

37.87%34.99%

37.24% 39.67%

28.31%

Contribution Margin Ratio

CR

Figure 6: Contribution Margin Ratio of Shinepukur Ceramics Ltd.

In the figure no. we can see that the contribution ratios form 2010 to 2013 were almost same. It

shows that the contribution ratio was always moving between the ranges of 35 percent to 40

percent. That means theses portions of sales revenue were not consumed by variable costs and

contributed to the coverage of fixed costs. The ratio was highest in 2013 compared to the other

years because the company decided to reduce their variable costs. But the contribution ratio of

2014 was much lower than the previous years, this happened due to an increase in variable costs

and decrease in sales revenue. That means a large portion of the sales revenue was consumed by

variable costs and caused a decrease in contribution ratio.

3.8 Break Even Point in Taka:

The break‐even point represents the level of sales where net income equals zero. In other words,

the point where sales revenue equals total variable costs plus total fixed costs, and contribution

margin equals fixed costs.

Years BEPT

2010 23,52,23453

2011 27,55,11260

2012 27,44,76039

2013 25,79,10378

2014 61,66,66697

Table 8: Break Even Point in Taka:

Table No. shows Shinepukurs breakeven point of five years when their sales reached a volume at

which producing products became profitable. At the break-even point, the company recovered its

investments in production and began turning a profit with each additional sale.

2010 2011 2012 2013 20140

100000000

200000000

300000000

400000000

500000000

600000000

700000000

BEPT

BEPT

Figure 7: Break Even Point in Taka:

The Figure no. shows that the breakeven points were almost moving at the same level since 2010

to 2013.The BEP was lowest in 2010, this happened due to lower fixed cost and higher

contribution margin. In 2014 the breakeven point went suddenly went sharply upward. One

reason was an increase in the company's fixed costs. A second reason for the increase in

Shinepukur Ceramic’s break-even point was a reduction in the contribution margin, as a result if

a greater proportion of lower contribution margin products were sold. Due to these reasons the

breakeven point of 2014 was highest among the other years.

3.9 Margin of Safety in Taka:

Margin of safety is used in break-even analysis to indicate the amount of sales that are above the

break-even point. The Table represents the marginal safety of the shinepukur ceramics.

Table 9: Margin of safety

Margin of Safety is the amount of sales which generates profit. In other words, sales beyond

Break Even Point are known as Margin of Safety. It is calculated as the difference between total

sales and the break even sales.

2010 2011 2012 2013 20140

200000000 400000000 600000000 800000000

1000000000 1200000000 1400000000 1600000000 1800000000

Margin of safety

Figure 8: Margin of safety

The figure represents the marginal safety of shinepukur ceramics since 2010 to 2014. The size of

margin of safety is an extremely important guide to the financial strength of a business. From

2010 to 2011 the marginal safety was large enough, which indicates that during those years BEP

Years MST

2010 1691522266

2011 1625933302

2012 1667874713

2013 1446656856

2014 1060990977

was much below the actual sales, that means business was in a sound condition and reduction in

sales would not have affected the profit of the business. After 2012 the margin of safety of the

company started to decrease. The margin was lowest in 2014 this happened due to an increase in

the breakeven point and any decrease in sales volume could have cause a loss to the company.

3.10 Net Income:

In business, what remains after subtracting all the costs (namely, business, depreciation, interest,

and taxes) from a company's revenue. Net income is sometimes called the bottom line also called

earnings or net profit.

The following table represents the net income of Shinepukur Ceramics from the year 2010 to

2014.

Years Net Income

2010 640491160

2011 568982965

2012 621357282

2013 573819171

2014 300422485

Table 10: Net Income

2010 2011 2012 2013 20140

100000000

200000000

300000000

400000000

500000000

600000000

700000000

Net Income

Net Income

Figure 9: Net Income

The figure shows that the net income of each year was almost same till 2012. The income was

highest in 2010 because the expenses were lower compared to the sales revenue. After 2013 the

net income started to decrease and in 2014 it reduced significantly. This happened because

company lost revenue and incurred a larger amount of expenses due to some additional costs.

3.11 Break-Even Chart Analysis:

The Break-even analysis helps in finding out the relationship of costs and revenues to output. It

enables the financial manager to study the general effect of the level of output upon income and

expenses and, therefore, upon profits. This analysis is usually presented on a break-even chart. It

helps in understanding the behavior of profits in relation to output. Such an understanding,

among other things, is significant in planning the financial structure of a company.

To understand the profitability nature of Shinepukur Ceramics Limited we have created Break

chart for the years of 2010 and 2014.

In these break-even charts, the concepts like total fixed cost, total variable cost, and the total cost

and total revenue are shown separately. It will also give you an idea about the extent of profit or

loss to the firm at different levels of activity.

The figures below shown are the graphical representation of the break-even analysis of 2010 and

2014 in the forms of a chart. The sales units are shown on the horizontal axis and costs and

revenue on vertical axis.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%0.00

200,000,000.00

400,000,000.00

600,000,000.00

800,000,000.00

1,000,000,000.00

1,200,000,000.00

1,400,000,000.00

1,600,000,000.00

1,800,000,000.00

2,000,000,000.00

Revenue

Fixed cost

Variable cost

Total cost

Units

Reve

nue

& co

st

Figure 10: Break-even chart of 2010

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%0.00

200,000,000.00

400,000,000.00

600,000,000.00

800,000,000.00

1,000,000,000.00

1,200,000,000.00

1,400,000,000.00

1,600,000,000.00

1,800,000,000.00

Revenue

Fixed cost

Variable cost

Total cost

Units

Reve

nue

& co

st

Figure 11: Break-even chart of 2014

Here we can see that the fixed costs stayed the same regardless of how many units the company

sold during those years. From the fixed costs lines show that the fixed cost of 2014 was much

higher than 2010. The Variable costs are dependent on production output. From these charts we

can see that the variable cost line of both the years were almost at the same. The total expenses

lines show that they have a positive or upward slop that indicate the effect of increasing variable

expenses with the increase in sales units. Total cost amount of 2014 was higher compared to the

year 2010. The total revenue lines and the total expenses lines crossed each other. The point at

which they crossed each other is the break-even point of 2010 and 2014. Notice that the total

expenses line is above the total revenue line before the point of intersection and below after the

point of intersection. It tells us that the business suffers a loss before the point of intersection and

makes a profit after this point. The break-even point in the above graphs are 23,52,23453 for

2010 and 61,66,66697 that agrees with the break-even point computed using equation and

contribution margin methods above.

Now if we compare the charts of 2010 and 2014 it can be seen that the difference between the

total expenses lines and the total revenue lines before the point of intersection (BE point) is the

loss area. This area reduces as the number of units sold increases. It means every additional unit

sold before the break-even point reduces the loss. The loss area of the company started to

increase after 2010. This happened due to a decrease in sales revenue after the year 2010 in a

continuous manner. Again The difference between the total expenses line and the total revenue

line after the point of intersection (BE point) is the profit area. Notice that this area increases as

the number of units sold increases. It means every additional unit sold after the break-even point

increases the profit of the business. It can be seen that the profit area decreased in a significant

manner in 2014. This happened due to higher fixed cost and lower contribution margin.

4.00 Conclusion:

c-v-p- analysis furnishes complete picture of the profit structure which enables management to

distinguish between the effect of sales volume fluctuations and the” results of price or cost

changes upon profits. It is essential that the results from break-even analysis are interpreted

correctly and the information is effectively utilized to make better, informed business decisions.

The break even analysis of Shinepukur Ceramics Limited reveals that the company is profitable.

But the profitability decreased in a significant manner after 2010 and in 2014 it generated the

lowest net income among the five years.

Profit performance of Shinepukur Ceramics can be improved by increasing sales volume, by

increasing selling price, by decreasing variable costs and by decreasing fixed costs. Or else if the

breakeven point continues to increase in this manner than in future the company has to face loss.

References:

1. Annual Report of Shinepukur Ceramics Limited (2010)





cost volume profitability analysis of shinepukur ceramics

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